Search growth helps loft Google over profit estimate

Google's revenue growth rate has been slowing, but for the first time since it went public, the company's quarter-to-quarter revenue declined.

(Credit: Google)

Buoyed by continued growth in search and by cost cuts, Google reported better-than-expected profitability for the first quarter of 2009.

Google's net income increased 8 percent annually to $1.42 billion for the quarter ended March 31, the company reported Thursday. Revenue increased 6 percent to $5.51 billion, but excluding commissions paid to advertisers (called traffic acquisition costs), revenue increased 10 percent to $4.07 billion.

On average, analysts surveyed by Thomson Reuters had expected revenue excluding commissions of $4.085 billion, a bit more than what Google reported. However, the company cleared the earnings forecast as it did in the fourth quarter with earnings per share of $5.16 compared to the $4.93 expected once various charges were factored out.

"Google had a good quarter given the depth of the recession--while revenues were down quarter over quarter, they grew 6% year over year thanks to continued strong query growth. These results underline both the resilience of our business model and the ongoing potential of the web as users and advertisers shift online," Chief Executive Eric Schmidt said in a statement. "Going forward, our priority remains investing for the long term to drive future growth in our core and emerging businesses."

Google makes money when people click on ads next to search results, so search volume growth is central to the company's business. So is the number of times people click, and that figure increased 17 percent from the year-earlier period, Google said.

"Aggregate paid clicks, which include clicks related to ads served on Google sites and the sites of our AdSense partners, increased approximately 17 percent over the first quarter of 2008 and increased approximately 3 percent over the fourth quarter of 2008," the company said.

Google been restraining its exuberant experimentalism, cutting several projects that weren't performing up to snuff. That included not just online services such as Dodgeball but also potential revenue-generation engines such as print and radio ads.

And it's cut hundreds of employees through the process--nearly 200 in sales and marketing, 100 recruiters, 40 in a radio ad project, and an undisclosed number of contractors.

Google's revenue increased yearly but decreased compared to the most recent quarter for the first time. It's not the only ascending curve to start dipping though: Google also for the first time had fewer employees, trimming head count from 20,222 in the fourth quarter of 2008 to 20,164 in the first quarter of 2009.

Google CEO Eric Schmidt

(Credit: Stephen Shankland/CNET)

Update 2:25 p.m. PDT: On a conference call to discuss the earnings results, Schmidt spoke in sober tones while touting his company's overall performance.

"No company is recession-proof. Google is absolutely feeling the impact," Schmidt said.

For one thing, people are still searching, but they're doing more window-shopping and comparison while buying less, Schmidt said. And advertisers are pulling back to bid more on search keywords that produce a stronger return on investment, which means bids in the keyword auctions are generally lower.

Overall, though, the company's business model is healthy, according to Schmidt. "We think Google is now well-placed for the recovery," he said. "The shift to online gives us a real advantage."

He made no economic forecasts about the future beyond cautioning that Google's second and third quarters are typically seasonally slower. Regarding the economy, he said, "we're still basically in uncharted territory."

Google also said that longtime executive Omid Kordestani, senior vice president of global sales and business development, is stepping down to become a senior adviser. He's being replaced by Nikesh Arora, currently president of international operations.